Written by: Alex Lowe
Trade tariffs are a foreign policy tool historically associated with the USA. A return to the use of tariffs in recent years to combat the rise of China and disputes with the EU has led to a resurgence of the age-old debate as to whether tariffs are an effective way to conduct foreign trade. With world trade so much more diverse and complex compared to when tariffs were first introduced in the 18th Century, it’s important to analyse their use in the context of their time, and whether the US still use tariffs to pursue the same motives they did when the policy was first used. In order to contextualise the use of tariffs in the modern day, it is important to start from the beginning to understand when and why tariffs were first introduced, seeing how the theory behind the policy has also developed to the present day.
What is a Tariff
A trade tariff works as a tax on certain imported goods. This means that it is more expensive for foreign traders to export goods into a country with tariffs and means that domestic goods are generally cheaper than their international counterpart. The idea is to encourage the consumer to buy domestically which should help protect domestic trade sectors and reduce the competition from foreign goods.
History of Tariffs as a Tool of US Foreign Policy
The Tariff Act of 1789 was one of the first pieces of legislation passed after the signing of the US constitution. It set a clear precedent of what was to become one of the hall mark policies of protectionist ideology that thrived in the US throughout much of the 18th and 19th Century. The idea behind the original Tariff Act was to protect US trade against foreign competition after the American Revolution and raise revenue for the government. The aim was to allow America to thrive domestically and grow its international standing from a solid domestic economy. From this perspective it could be seen as an initial success because high tariffs allowed US industries such as manufacturer and infrastructure to boom, one of the most significant factors in the mass industrialisation of the US. Furthering this, it is argued that when Tariffs were at their peak, they produced almost 95% of the revenue for the US government.
The more integrated the US became in world affairs throughout the nineteenth century and the bigger their economy became; the idea of trade tariffs began to be challenged. The real turning point came after the Wall Street Crash and resulting Great Depression in the late 1920s and early 1930s. The passing of the Smoot-Hawley Act in 1930 raised tariffs by 20% in a response to the global economic crisis. However, rather than protecting domestic industries, it caused European nations to retaliate back by imposing their own tariffs on US goods. This resulted in a tariff war which hampered world trade altogether, deepening the crisis. Some argue that the tariff war played an insignificant part in declining trade in the aftermath of the great depression because the lack of demand for exports was offset by the demand for domestic products, and that the lack of trade was a consequence of a deepening crisis, rather than a cause.
Having said this, the era after the Great Depression until the present day can be seen as a period of relaxing and reducing tariffs and the promotion of free trade. This shows that whilst tariffs may not have been a primary cause of the Great Depression, they also were not the solution to a deepening economic crisis. The reduction in tariffs throughout the rest of the 20th Century allowed for the economy to trade freely. This was emphasised by the creation of the World Trade Organisation (‘WTO’) who’s ethos is to promote free trade and the reduction of protectionist tariffs across the world. This more open policy has been favoured in the decades since World War Two because it removes the need for a county to generalise their focus on specific sectors of trade. Being able to export and import freely means a country can specialise their focus and rely on imports for the rest of their commodities, without suffering through tariffs.
Recent Use of Tariffs
In recent years trade tariffs have come back into the spotlight, with Trump, and now Biden, using tariffs to push their foreign agenda and protect American industry. The main revival came in combatting the US-China trade war. Trump used tariffs of 25% up to $250bn on up to 60% of Chinese goods. The main reason for these tariffs was to address the trade deficit with China and to challenge alleged theft of US companies’ intellectual property. On the first point, in 2019 China were in a net deficit of over $400bn in trade with the US, meaning they were buying less from the US than they were exporting, hurting US industries, and allowing their own to blossom. After three years of tariff threats China and the US reached ‘the Phase One Agreement’, which reduced some tariffs in return for China promising in 2020 and 2021 to purchase an additional $200bn in US stock. However, economic forecasts show that China may only reach 58% of that additional pledge, which has meant Biden has continued to pursue a hard line against China, with tariffs still in place.
The need for the US to protect their industries from China ran further than just the trade deficit. The way China conducts trade came into question when Trump accused China of stealing US companies’ Intellectual Property throughout his time in office. One of the last attacks on China was ordering the shutting down of a Chinese Consulate that US official claimed was a base to hack US healthcare and technology companies working on COVID-19 vaccines. It appears as though Biden’s election win has not changed the way in which the US will respond to Chinese alleged IP theft, using tariffs as a way to tackle Chinese scepticism. Most recently alongside tariffs, the US have blacklisted seven supercomputer companies that are alleged to have obtained US technology to help boost the Chinese military.
Another example of US tariffs are those against the European Union. The origins of the most recent trade war between the blocs’ pre-date both Biden and Trump. They started over a rivalry in the aviation sector between US backed Boeing and EU backed Airbus. The disagreement’s intensified under Trump who claimed the Airbus received state backing and therefore posed a threat to US industries and national security. The US tariffs of over $7.5bn reached all sectors of the economy from Scotch Whiskey and Italian Cheese. In retaliation the EU hit back with $4bn in tariffs on products including Tractors and Tobacco.
Looking to Biden’s recent talks with the EU, it appears the US and EU are beginning to put their differences under Trump behind them. The EU and US have promised a ceasefire on planned tariffs, with the US suspending an increase on tariffs for Malt Whiskey. Instead, it appears the two are siding with one another to tackle the rise of China and growing suspicion of Chinese trading standards, including the theft of IP.
What is interesting when you compare how trade tariffs were used when they were initially bought in after the American Revolution compared to now is the far more political ideology behind the policy. The Tariff Act was bought in to protect American Industry and raise tax. Raising tax through tariffs has become a secondary point in to protecting American Industry. Going further it could be argued that the indirect nature of tariffs to solve unrelated disputes is also a deviation from the original theory behind the policy. Using both IP theft and disputes over state backing in the aviation sector as examples, tariffs have not been used to directly protect corresponding industries. Instead, taxes have been used to impact other industries, such as agriculture or food. What this highlights is that tariffs are no longer primarily an economic protectionist policy, but an aggressive political tool used to further international agendas. Rather than protecting industries, they have weaponised them in unrelated disputes, causing constant volatility in a variety of sectors of the economy.
One thing seems to be clear, whilst President Biden may never self-proclaim himself ‘The Tariff Man’, there does not seem to be a seismic change in approach under his leadership. Whilst he has seized on the opportunity to re-set relations with the EU, it does not mean trade tariffs have been once again shunned. They still appear to be at the front of any toolkit used challenge international disputes, and it is clear they are no longer used in the same way as they were after the American Revolution.